Friday, June 10, 2011

Inflation Falls; Consumer Confidence Rises

I am just including these two measures in a single post and am not suggesting a direct causal relationship between them.

The May Consumer Price Index release from the CSO shows that the rate of annual inflation fell from 3.2% in April to 2.7% in May. However once we strip out mortgage costs and energy prices our measure of core inflation hardly moved with a recorded drop from 0.66% to 0.61%.

We can see that excluding mortgage interest, which is being pushed up as banks raise their standard variable rates, and energy prices, which is rose because of excise duties and the externally determined price of oil, that prices across most of the economy are, on average, relatively stable.

The measure of core inflation used here accounts for around 85% of the total index so those who are suffering from rising prices are

those with standard rate mortgages with mortgage interest in the CPI (weighting 6.66%) up 20.1% on the year (we can also expect a further increase in ECB linked tracker mortgages over the coming months.) and

those who purchase a lot of fuel with energy prices in the CPI (weighting 7.77%) up 10.5% on the year. These are particularly drivers, as petrol and diesel make up about 50% of the energy subgroup and are up 14% on the year. See here. The other half of the energy sub-group (electricity, gas, liquid and solid fuels) is also rising up 6.6% on the year.

So somebody who has a standard variable rate mortgage and drives a lot is facing significant price increases compared to 12 months ago. Outside of these particular cases the average inflation rate is quite low with the other 85% of the index rising only 0.6% on the year.

This week also say the release of the May update of the ESRI/KBC Consumer Sentiment Index. The index rose from 57.9 in April to 59.4 in April. This seems to be based on future expectations where the sub-index rose by 8.5 points on the month rather than current conditions where the sub-index fell by 8.8 points on the month.

At 59.4, the index is now significantly above the local minimum of 44.4 recorded in December 2010 in the aftermath of the EU/IMF intervention and the global minimum of 39.6 in July 2008 with the pace of economic decline was at its most severe. The consumer sentiment index is showing improvement but it is from very low levels and the overall outlook remains gloomy.